Environmental Incentives Over Time: From the First Forms of Regulation to the Recognition of Cognitive Biases

The impact of economic activity on the environment is considered an external effect when it is not taken into account in the decision‐making process of economic agents. This chapter introduces the general functioning of traditional forms of environmental regulation with examples of application. It discusses the main sources of ineffectiveness of the traditional forms of environmental regulation, taking into account of individual behaviors in the development of environmental policy, thus contributing to the emergence of new forms of environmental regulation which do not necessarily involve the market. Pigovian taxes, or eco‐taxes, are aimed at restoring socially optimal equilibrium in a market economy by imposing a tax on the externality so as to equalize the private and social costs of an activity. The taking into account of behavioral biases and agent psychology in economic analysis is contributing to the emergence of new forms of regulation that do not necessarily include markets.